How Microsoft Became Denmark's Billion-Dollar Baby

Like the ghost of Hamlet's father, the 2002 purchase of a Danish tech company has come back to haunt Microsoft. Denmark's taxing authority wants the software giant to pay $1 billion in back taxes related to the acquisition. The purchase made headlines in the country back then, and Danes have some opinions now about Microsoft's business practices involving their homegrown firms.

By David Vranicar
03/09/13 5:00 AM PT

Earlier this week, reports
surfaced that the Danish tax authority was seeking US$1 billion in back taxes from Microsoft.

The case, the biggest ever pursued by the Danish tax authority, stems from Microsoft's 2002 purchase of the Danish company Navision. Microsoft promptly sold Navision to one of its subsidiaries in Ireland -- a country, as it happens, that has a much more palatable corporate tax rate than Denmark.

Nearly a decade after Navision was sold, Denmark is now claiming that the deal was far below market value and is seeking the lost tax revenue. This development, coupled with the EU's
decision
Wednesday to fine Microsoft nearly $750 million, has resulted in a bad week for the software giant in Europe.

In this TechNewsWorld podcast, we are joined by Kevin McGwin, the editor-in-chief of the
Copenhagen Post. McGwin discusses what Danes think of the Microsoft tax bill, a busy Danish tax authority, and more.

Editor's Note: Later in the podcast, there is a brief remark about Denmark's current corporate tax rate. It was recently
lowered from 25 percent to 22 percent.

TechNewsWorld: This claim by the Danish tax authority against Microsoft for $1 billion -- it's been a huge story in tech circles just because it's such an enormous sum of money and also because Denmark doesn't often make a splash in the news, so I think people also took note of that as well. I'm curious if this story is resonating in Denmark and if it's as big a deal there as it is in the tech world.

McGwin: It is -- as you said, it made a splash, and it did make an enormous splash here when the headline was first announced. One, because it's Microsoft, and two, because when Navision was sold, it was a fairly big deal for Denmark. It was a homegrown Danish software company that was being bought by at that time -- and Microsoft still is -- one of the world's most important, one of the world's biggest software companies and computer companies in general.

TNW: And that sale was for about $2 billion, right?

McGwin: Yes -- $1.5 billion. And it was one of the biggest buyouts of a Danish company at the time. And so it certainly anytime this company (is in the news), it does make a splash.

But surprisingly, for me, it has died down fairly quickly. There haven't been too many follow-ups on it, and part of the reason is I think this whole transfer pricing, and shipping profits abroad, is kind of an ongoing theme in Danish news with multinationals that have operations in Denmark. Some companies have been operating here literally for decades and haven't turned a profit, or have turned very little profit, when we know that internationally these are very profitable companies.

TNW: Navision was purchased by Microsoft and then sold to Microsoft Ireland.

McGwin: Right, Navision was purchased by Microsoft in 2002, and then between 2003 and 2004, when Navision was being integrated as a Microsoft company, it had its billing and shipping operations ... (those) were sent to Ireland. And that allows Microsoft to record those sales as Irish sales, and Ireland has a corporate tax rate that is 12.5 percent, and at that time, the Danish corporate tax rate was about 30 percent. So Microsoft was doing what companies do: They were maximizing their profits.

But what the big question here is what Microsoft valued that business as. According to Danish records, up to the time of the sale, Navision's tax income was 133 million Danish kroner a year (roughly $23 million). And Microsoft's expected tax income was about 750 million kroner a year ($129 million). And Microsoft's argument there is, "Yes, the amount is much higher, but without our label on it, Navision -- maybe it's good software, but it would never have made as many sales without our label on it, without Microsoft on it."

TNW: And did that argument resonate with Danes?

McGwin: Well, that's the argument that they're making now. And it's -- no, it's not resonating. It's a lot of money. You know, it's billions and billions of kroner. And these money figures, these towering money figures, don't mean anything. But when they frame it in terms of the number of schools you could run, the number of hospitals you could build, the bridges you could build, it starts to really add up. It starts to really be important.